Investing in Russia is the real Olympic event

How the Olympic host went from next big thing to fool’s gold medalist

Russian President Vladimir Putin listens to a journalist's question during a televised news conference in Sochi.

Welcome to beautiful Sochi, on the Russian coast of the Black Sea, for the 2014 Winter Olympics!

We’re afraid we haven’t finished building your hotel room yet, so remember to dress warmly when you go to sleep by the open window. Don’t under any circumstances drink the greenish-brown water flowing out of your bathroom tap, as it contains dangerous chemicals. We’re sorry that there’s no hot water. Oh, and please don’t put your used toilet paper in the actual toilet in your bathroom. Put it in the bin in your room instead. (See Sochi hotel horror stories begin to surface)

Welcome!

Oh, and by the way—would you like to invest in our country?

As the world watches the Sochi Winter Olympics, which began this week, by far the most interesting coverage so far has come from the outraged tweets of western journalists trying to check into their hotels there. On Tuesday the Washington Post published an hilarious roundup of some of the tweets. They defy satire.

Most of the time, reporters who don’t snag an “assignment” to the Olympics envy those who have. Not this time. Enjoy yourselves!

But as our shivering colleagues huddle around burning firewood and cheap vodka to keep warm, they should try this on for size.

Just three years ago the world’s top money managers—the people who oversee hundreds of billions of dollars of the world’s savings—thought Russia was the bee’s knees.

It was the future. One of the most dynamic and exciting economies in the world. Surveys showed it was one of their favorite investing destinations anywhere.

They could barely contain their excitement.

Money managers poured their money into the stock markets of Russia along with China, India and Brazil—the so-called “BRICs”—as the Next Big Thing.

They couldn’t get enough of the BRICs. These were the Next Frontier in investing, the exciting new fast-growing “emerging” economies of the future. They were deemed far more dynamic than the boring old slow-growth countries of the developed world, such as the U.S., let alone (yuck) Europe or Japan.

How’d that work out?

Oh dear.

Since then, money managers have found themselves unwilling participants in an Olympic downhill event.

Or, maybe more accurately, they’ve found themselves competing in the luge—without a helmet.

In the past three years, investors in Russian stocks have lost about a third of their money (when measured in U.S. dollars), according to financial data company MSCI.

And that’s the case even though the Russian stock market is dominated by the stocks of gigantic oil and gas companies that ought to be reasonably stable.

The stocks in smaller companies—which are often a better indicator of a country’s underlying economic strength—have been much worse. According to MSCI, Russian small caps have fallen more than 60% in three years and are down about three quarters from their 2007 levels.

Russian stocks were in the tank even before the latest turmoil hit so-called “emerging markets.”

Meanwhile the markets of Brazil, India and China have also tumbled alarmingly. In the past three years the MSCI index of the BRICs has plunged by 28% in dollar terms.

How about the rest of the boring developed world? Oh, it’s up nearly a fifth.

You couldn’t make it up.

I hope some of the money managers who lost clients’ money on Russian stocks are now guests in Sochi, tramping out to a freezing outhouse at two in the morning. But I doubt it.

Retail investors, incidentally, did the same thing. According to Strategic Insight, a company that tracks the fund flows into and out of investment funds, U.S. investors have been stampeding out of Russia-focused funds for several years.

Since early 2011 they have yanked nearly $600 million from funds investing in Russia and Eastern Europe, leaving a paltry $2.3 billion invested. In 2009 and 2010, by contrast, there was a stampede into these funds: U.S. investors poured in a net $1.3 billion.

The central lesson in all this, once again, is that you should run a mile from the latest “hot” investment fad, whatever it is.

What about now?

Frequently, countries about to host the Olympics enjoy some kind of stock market boom in the months before the event. The economy gets a boost as the government spends a ton of money on Olympics infrastructure. And the forthcoming event stimulates some extra interest in the country among foreign investors. There’s a kind of “halo effect.”

Not this time around. Sochi isn’t causing a halo effect. We’re more likely to see…well, call it a blocked toilet effect.

The Russian stock market is down another 10% just since the start of the year. Today, according to FactSet, it is about the cheapest stock market in the world when compared with fundamentals. (See: More global stock markets enter correction)

The Russian market trades on just five times forecast per-share earnings (compared with 13 times per-share earnings for the rest of the word), and just 70% of book or net-asset value (compared with 180% of net-asset value for the rest of the world).

The worse the headlines, probably the further it will fall. It’s already dirt cheap. Those looking to go against the crowd could do worse than place a wager on, say, Van Eck’s Market Sectors Russia exchange-traded fund.

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